Coca Cola Bottlers Japan

Thank you for joining us today for our second quarter 2020 earnings call for analysts and investors. I'm here with President Kaleen Dragan, CFO Bjorn O'Genis, Head of Commercial Kostin Mandrea, and Mr. Takashi Wassa from the Coca-Cola Japan Company. Following prepared remarks, we will be happy to take your questions. This presentation is intended for analysts and investors, so we ask members of the media listening to today's call to please hold your questions for our media session scheduled separately today. Simultaneous translation for both Japanese and English is being provided for today's presentation and during Q&A with separate telephone lines for Japanese and English. Before we begin, let me remind you that today's presentation contains forward-looking statements, including statements concerning annual and long-term earnings objectives, and should be considered together with cautionary statements contained in our supporting presentation deck, both are posted to the Investors section of our company website at ccbj-holdings.com. Please look on our website for this information in both Japanese and in English. Now, I'd like to turn the call over to President Kaleen Dragan. Kaleen?

Thank you, Ray, and good afternoon, everyone. I'm Kaleen Dragan, and thank you so much for joining today's earnings call. Today, we will present our year-to-date second quarter financial results, as well as updates on various strategic initiatives and current conditions in Japan market given ongoing volatility. But before we start, I would like to express my sympathy and condolences for those who have been impacted by the coronavirus, as well the heavy rains and flooding that many parts of the country experienced in July. Our mission at Coca-Cola Bottler Japan is to provide happy moments to everyone while creating value, and this is so important during these tough times. Our first priority has been the health and safety of our employees, our customers, and the local communities where we live and work. and we will continue to ensure a safe and stable supply of essential beverages and services to all, including support to our customers and business partners who may be struggling because we are all in this together. So let's start by looking at an overview of our first half performance on slide six. The second quarter reflects the full weight of the government's emergency declaration period and a decision to postpone the Olympic Games, which will impact our marketing plans for the year. Sales volume was down 18% in the quarter and 11% year to date. We have continued to target an appropriate balance of value and volume share performance in a tough market this year. while also making a pivot from the original Olympic heavy 2020 marketing plan. Though the market has experienced a decline in vending consumer traffic and sales volume during the COVID-19 outbreak, we are making progress, including steady market share gains during the first half of the year. During the second quarter, we were able to quickly start up cost-saving initiatives that are helping to offset the current year's top-line pressure. In fact, we achieved more than 10 billion yen in cost savings year-to-date, and these urgent efforts will continue for the rest of the year. At the same time, we have accelerated important transformation initiatives like the Vending Channel Operations Project, which has rolled out nationwide at the end of June. I am pleased to announce we started operation at the new world-class Hiroshima plant in June, just two weeks since the flooding disaster in 2018. We have expanded our nationwide supply network with seven new production lines installed since last year, including four new lines in the first half of 2020 during the coronavirus emergency. And finally, we are carefully monitoring conditions during the summer in order to be able to estimate earnings guidance for the year. Given ongoing COVID-19 uncertainty and poor weather in July, full-year guidance cannot be reasonably estimated at this time. Slide seven. You can see a snapshot of the COVID-19 situation in Japan. Clearly, consumer movement has been restricted with high rates of telework and general self-restraint on unnecessary trips out of the houses. Although the emergency declaration has been lifted, we are seeing a new uptick in the new coronavirus cases this summer, which adds uncertainty to this important period for the beverage industry and for Coca-Cola Bottlers Japan. On slide eight, I would like to update a slide I shared with you in the first quarter presentation when we were entering the state of emergency. The industry is experiencing significant online pressure from volume declines and shifts in channel mix, as summarized here. In this tough environment, Coca-Cola Bottlers Japan is operating under clear guiding principles for market execution that help us prioritize what we can do while leaving no stone unturned to identify opportunities for cost savings and optimizing capital allocation. Please look at slide nine. So where are we in this unprecedented year of coronavirus. Coca-Cola Bottlers Japan is navigating this critical year with an aggressive cost-saving focus. I have been saying business as usual is not an option, and now more than ever this is true. It reflects our urgent mindset to emerge from this crisis as a more agile player and build on the solid progress we were seeing at the beginning of the year before the pandemic hit we made a tough call early in the year to withdraw our earning guidance and then we were able to quickly ramp up major cost saving initiatives to help us weather the current storm we have major programs underway to react to current market realities and to keep on track and even accelerate longer-term transformation initiatives. And we are assessing the outlook for 2020, as well as the assumptions that underpin our mid-term strategic business plan. Let me now ask our CFO, Bjorn Ulganes, to review our first half results and provide some color on current conditions. Then I would like to ask Wasa-san of Coca-Cola Japan, to discuss our marketing approach during this with-corona period. Bjorn?

Bjorn Ulganes Thank you, Karin. Good afternoon, everyone. I'm Bjorn Ulganes, CFO of Coca-Cola Bottlers Japan Holdings. Slide 11 is a summary P&L view of our first year, first half results. Consolidated revenue declined 11 percent as core beverage volume declined 11% in the first half of the year. Consolidated business income declined year on year, mainly due to the impact of beverage volume and mixed pressure. We had an operating loss of 13.1 billion yen in the first half, which was a 52 billion yen improvement from the prior year. as we cycled one-time expenses such as goodwill impairment and the voluntary employee retirement program in the first half of 2019. On slide 12, you can see the main drivers of our first half business income. As Colleen said, Q2 was impacted by the COVID-19 emergency declaration. Volume and mix declines are putting pressure on our overall first half results, and we have rapidly identified and implemented cost savings to mitigate the impact. Starting on the left-hand side of the slide, you can see volume, price, and mix, which shows the year-on-year change in marginal profits from the commercial activities of our beverage business. We experienced a net 20.4 billion decline in marginal profits driven by a 12% volume decline in non-alcoholic ready-to-drink beverages and negative channel mix. The marginal profit decline in the standalone quarter was 18.5 billion yen. Of the 20.4 billion yen decline, negative volume and channel mix makes up approximately 24.5 billion yen, as the vending declined 15% and the drug and discounted channel grew 6%. Price and product mix were also negative, as package mix declines offset the ongoing benefits of the large PET wholesale price increase in April 2019. Our Lemondo alcohol brand sold 4.2 million cases in the first half after expanding nationwide in October last year. This and a decline of variable expenses, such as vending commissions and promotional discounts, helped to offset some of the volume, price, and mixed pressures. Fixed marketing expense for DME decreased 2.8 billion yen as we cut back on marketing spend given the coronavirus-led volume decline, and as we look to revise our marketing plan to reflect the delay of the Olympic Games and stay relevant with changes in consumer behavior. Raw materials and commodity costs continue to ease, with a 600 million yen benefit driven by favorable foreign exchange and commodity trends, including PET resins. Manufacturing costs increased 2.7 billion yen, reflecting lower than planned production volume and higher depreciation expenses from the investments we have made in new production capacity. In others, there was a benefit from significant cost savings in labor, IT, travel and entertainment, and other areas which we have implemented since the COVID-19 outbreak. We are also seeing a benefit from lower logistics and distribution expenses. Business income for the health and skincare business increased slightly as the business has been less impacted by the COVID-19 outbreak compared with the core beverage business. And we are focusing on promotional cost savings. The story of the second quarter is really all about top line pressure and aggressive cost management. Let me double click on these drivers on slide 13. Sales volumes were really depressed during the period of the government's emergency declaration, with the biggest decline in April and May. As the state of emergency was lifted, we saw some moderation in the volume decline in June But with very wet and cool weather in July and a number of new coronavirus cases starting to pick up again, there is a lot of uncertainty in the outlook for the summer. We made a call to withdraw earnings guidance in May and have since then worked very hard to take out costs in a comprehensive way. We have achieved over 10 billion yen in cost savings so far this year, with more to come in the areas of labor, marketing, logistics, and depreciation. Slide 14 explains our market share performance and retail pricing trends. So far in the year, despite the volume pressure, we have stayed disciplined on pricing, and we have observed that the benefit from last year's wholesale price increase on large PET packages continues to hold. In addition, The delay of the Olympics announced at the end of the first quarter has meant that we need to course correct our marketing plans that were originally highly Olympic-focused in the second and third quarters. This takes time to be reflected in the marketplace, and as a result, we have seen some decline in market share in the second quarter. In vending, we are seeing underlying progress as we transform the business, and we are encouraged that our market share is growing despite the volume decline. Vending is and will continue to be an important channel catering to consumers' preferences for convenience. As the biggest vending player in the industry, we believe these share gains and structural reforms will position us well for the future. You can find volume performance for non-alcoholic beverages with commentary by channel and category on slide 15. As explained previously, the retail and food, vending, and convenience store channels have been significantly hit by COVID-19 since March. Conversely, the online channel continues to grow in the double digits and now represents about 2% of the overall volume. Average revenue per case declines in supermarkets and drug and discounters was driven by cycling the prior year wholesale price increase for large PET packages introduced in April 2019 and the package mix shift in these channels as consumers look for larger size and case offerings for increased at-home consumption. Convenience store revenue per case improved through premium new product launches like Phantom Premium Grape and Latinista Coffee. You can find second quarter volume data as well as buy package information on slide 16. Given the high uncertainty we face this year, it is imperative to be what I call good stewards of capital. We are maintaining our solid financial position and ensuring liquidity while re-evaluating priorities for capital allocation, including CapEx. We now expect CapEx for the full year to be about 21 billion yen lower than our initial CapEx plan for 2020, that we announced in February. This includes temporary suspension of new vending machine purchases, given the slowdown this year, and reducing other discretionary capex. With the revised capex outlook, we expect depreciation for this year will decline 2 billion yen against the initial plan to 60 billion yen. Actual capex in the first half was approximately 39 billion yen, with depreciation of 29 billion yen. And we reinstated the year-end dividend forecast of 25 yen per share, given a more stable cash flow outlook, reflecting the aggressive cost-saving programs and efforts to clean up the balance sheet. Now, let me move to our rest of year outlook. Even though we did see some initial signs of recovery in June, many uncertainties remain for the balance of the year, and especially for the summer. The beverage sales volume contraction in July has continued into August, as COVID-19 cases are growing again. The volume declines in food service, vending, and convenience store channels is continuing, and this is expected to drive negative channel mix pressure. We are evaluating multiple scenarios for the 2020 plan, as well as potential impacts or mid-term strategic business plan assumptions, while at the same time urgently implementing mitigation plans to help protect the top line and aggressively looking at cost-saving opportunities. Now, Chief Marketing Officer of Coca-Cola Japan, Takashi Waza, will take you through an update from our partners at the Coca-Cola Company here in Japan, and then Colleen will rejoin the call to wrap up. Waza-san, please.

Good afternoon, everyone. I'm Wasa, Chief Marketing Officer of Coca-Cola Japan. Today, I would like to talk to you about the changing consumer trends caused by COVID-19 and marketing efforts to address the various challenges facing the soft drink industry by using a few examples. Firstly, we would like to introduce the donation program for the Japan National Team for Olympic and Paralympic Games. And I would like to also give you the report on the recent results. Next topic, what we are focusing on marketing activities in the second half of this year amid uncertainty of COVID-19. Please refer yourself to slide 21. I would like to introduce the donation program for the Japan national teams for Olympic and Paralympic Games and report on the interim results of the program. In the midst of postponement of the Olympic and Paralympic Games, and the mood of self-restraint due to the spread of COVID-19. The posts on the SNS, social media, and news from the athletes, Olympians, and Paralympians have become a source of hope and encouragement to the people of Japan. The other day at 8 p.m. on July 24th, At the new national stadium, the same place where the opening ceremony for the Olympics would have held, swimmer Rikako Ikea sent out a message. I suppose her message has touched many's heart, but on the other hand, The postponement of the Olympics and the Paralympics for one year has left some amateur athletes and organizations struggling financially, and Coca-Cola has launched an athlete support campaign to help these athletes. During the campaign period of June 15th to September 4th, Team Coca-Cola Olympic SharePoints can be accumulated through the Coca-Cola official app, CokeOn. you can donate your points to either the Japan national team for Tokyo 2020 Olympics or the Paralympics team. As of August 9th, 630,000 consumers have already participated in this donation program, and approximately 14 million yen has been raised in total. The campaign also aims to raise awareness and sales of Coca-Cola's core products. Please look at slide 22. Now I would like to continue by talking about our marketing activities during the COVID-19 pandemic. We are reviewing our plan based on three main guiding principles. fewer, bigger in innovation, pivot to the core, and capture a stay-at-home demand. Please look at slide 23. The first guiding principle is to focus fewer, bigger in innovation. The goal is to narrow down the number of new products and instead focus on marketing investments so that each product has more of an impact on the market. Please look at slide 24. Here are the three big bets, new products, and initiatives for the first half of 2020. Fanta Premier was introduced with the goal of re-recruiting adult consumers who have graduated from Fanta and flavored carbonations. It is the most successful Fanta flavor of the past decade, thanks to its focus on the fruit juice and its high reputation in terms of taste. The new Georgia Latinista brand, which focuses on milkiness, has been successful in attracting new users, especially young adults and women. In addition, Georgia Japan Classman, a message bottle designed by the popular young Japanese creator, was a big hit with consumers. Together with Latinista, we are expanding our share of the growing market for PET bottled coffee. Please move on to slide 25. The second principle is pivot to the core. that trust and a sense of security are sought after more than ever under these circumstances, and that long-selling coal plants are becoming increasingly important in consumer goods as well. This year, our flagship Coca-Cola trademark began pilot launch of packages tailored to consumer needs. at supermarket and drugstore and discounted channels in Tokyo, Kanagawa, Chiba, and Saitama prefectures. To meet the needs of a declining birth rate and aging population, as well as small households, we have introduced a 350ml PET bottle that can be consumed by one person and a 700ml PET bottle that is perfect for two people. Launching packages and sizes that best meet consumers' needs has contributed to overall sales performance to Coca-Cola trademark. Now on slide 27. On August 31st, Coca-Cola Zero will be fully relaunched. Consumers are spending more time at home and their need for refreshment is increasing. Many consumers are feeling lack of exercise, and they are also looking for a zero-calorie product. In this relaunch, we have succeeded in improving the aftertaste in particular, allowing consumers to enjoy the unique Coca-Cola flavor and refreshing taste. We hope you enjoy this new version of Coca-Cola Zero. Next slide. The third principle. is to capture a stay-at-home demand. Please go on to slide 29. Let me introduce you what we are doing for rapidly growing e-commerce and online channel. With more and more people staying at home, there has been a surge in purchase of PT bottled beverages through e-commerce channel. To address this, We are expanding our label-less products, which do not have labels for PET bottles. In addition to Ilohatsu, we are now selling three products that are Ayataka, Sokenbicha, Canada Dry, and the Townsend Strong through e-commerce channel. These products are label-less, environmentally friendly, and have the advantage of being easy to separate the trash at home. On slide 30. Lastly, I would like to introduce is Ayataka's Rich Dining Experience campaign. As people are eating out less and less and becoming more and more conscious of cooking for themselves, they are also becoming more efficient and time-saving in their eating. The Ayataka campaign, which aims to enrich eating time with the deliciousness of a teapot, will be comprehensively rolled out through a series of TV commercials and in-store activities. To summarize my presentation, the impact of COVID-19 is causing unprecedented changes in consumer mindset and behavior. We're responding flexibly to these changes to our marketing plan in line with our business purpose. Our marketing plan also should be flexible so that we can accommodate these changes and needs. And we will stick with our business purpose of refresh the world, make a difference. In order for us to provide these refreshing moments and forward-looking attitude, we will continue to deliver refreshing moments and positive feelings through our beverages and provide the activities needed by local communities. Thank you very much for your attention.

Thank you, Wasa-san. Colleen here again. So let me provide an update on our ongoing transformation work before we wrap up today. Please look at the slide 33. We are facing a fair amount of uncertainty now and into the summer in terms of expected volume performance, consumer behaviors, and, of course, the progression of the COVID-19. We are addressing the situation with a sense of urgency, quickly ramping up cost savings, replanning marketing activities, and being prudent about how we balance necessary investments against short-term market realities. For the balance of the year, we will continue to focus on what we can control. I think we are positioning ourselves well in the near term with cost savings and for the longer term with the stronger foundation in vending, salesforce capabilities, digitalization, and work style reform from the transformation work we are doing now. On slide 34, We highlight the accelerated pace of the important transformation work across our routes to market in both vending and over-the-counter. We doubled the speed of the intended rollout of this program and finished nationwide deployment at the end of June. These initiatives are important now as they bring cost savings in a tough year, but they are also the foundation for our strategic mid- to long-term outlook. We completed the expansion of our national supply network. The final piece of the puzzle being the commissioning of our state-of-the-art new Hiroshima plant, which will provide flexible capacity and room for future growth to serve evolving consumer demands. In total, we have introduced seven new manufacturing lines since last year, including four new lines in the first half of this year, while we have been managing through COVID-19. The simultaneous upgrading of our logistic infrastructure also continues on plan. We have introduced three new automated warehouses And the Saitama Mega DC construction is on track for completion at the beginning of 2021. During life with COVID-19, it is even more important to step up investing in our people and workplace. And as shown in slide 36, we have launched Coca-Cola University Japan to offer comprehensive programs to develop future leaders with a clear focus on investing to make our work environment more accommodating to flexible work styles and to foster a more diverse and inclusive workplace. This is also a key part of our initiatives to create value share that we call our CSV goals, which focus on inclusion, resources, and local communities. In the area of sustainable resources, on slide 37, we recently announced a joint project with Far Eastern New Century Corporation to pilot test commercialization of chemically recycled PET to advance our world without waste packaging commitment. The goal is to build this at a commercial scale in the next few years. Our community efforts this year have been focused on providing support to frontline medical workers, sanitation staff, food banks, and others in need. As a full Coca-Cola system, we have been very active with Coca-Cola Japan in identifying areas of need and quickly deploying resources while continuing to provide consumers with a safe and stable supply of essential goods and services. Please look at slide 39. The second quarter has certainly seen the full impact of the government emergency declaration and restrictions on people, movement, and business operations. The outlook for the rest of the year is still uncertain, given the uptick in the new COVID-19 cases and the cool and rainy start of the summer. The third quarter is historically our peak season and the most important quarter in the year in terms of delivering profit. We are carefully calibrating our actions in the market and watching our performance during this time. Through rapid cost savings and various mitigating actions, we are making our best efforts to partially offset the current year's top-line pressure while continuing to do the right thing for the health of our business long term. We will announce an update to our full earnings guidance once we have better visibility on third quarter results. And we remain committed to the challenge we have set for ourselves by driving fundamental transformation to sustain and recover our business into the future. Let me now ask Ray Sheldon to come back for question and answers.

Thank you, Colleen. Let me remind you this Q&A session is intended for analysts and investors, so we ask members of the media on the call to please hold your questions until our media session scheduled separately today. We're using simultaneous interpretation, so please make sure to ask questions in the language of the line you are joining, Japanese on the Japanese phone line, and English on the English phone line. Please try to ask one question at a time as we are translating your questions. Operator, we're now ready for questions.

If you have a question, press 01 on your phone.

Both channels are open, English and Japanese. We have a question from Nomura-san, Nomura Securities. Hello, this is Fujiwara from Nomura Securities. And I would like to ask one question at once, one by one. So talking about the Japanese beverage market, what is your view on the future? This is my first question. Of course, you know, we are going to experience an impact from COVID-19, but I'm especially interested in the vending machine market. From next year on, what is your view on the vending market?

I'm just going to make sure we got your question okay. The question is on the future of the Japan NARTD, non-alcoholic beverages and beverages market, and how we're looking to that future, especially the vending channel. How do we see that going forward? I think I'm going to send this first to Colleen, and then we'll open it up to Kostin after that, please.

Thank you so much for the question. Colleen Dragan speaking. Well, I have to start by saying that I'm extremely confident in the Japanese beverage market, and I think it's the right place to be in. We have observed the Japanese market for a number of years right now. We are operating here for decades. But when we are comparing it with other developed markets, we are happy to realize the fact that Japanese market is growing. And it's growing in a healthy way in a way more diversified way in a number of categories. And that's a great news for our business because we are participating in almost all the NARTD beverages categories. So from that perspective, we are expressing our optimism and hence through our investment in the Japanese market, we prove our commitment to it as leaders of this NERDD market. So having said that, we were always looking at the Japanese market with worries because of the aging population, for example, as being one of the main threats. And that was a hot topic over the last years. But I would like to say that through our own evaluation, we realized that actually all this aging population and aging society, it can turn out on a benefit for us. Because one of the big things that is happening with the current population by aging, they are bringing with them by age group as they are aging on their habits of drinking packaged goods, and which the current generation, for example, in advanced ages doesn't have it. So that's a great news for us because basically they will continue to be our customers at way later age stages. Not only that, we are observing a new trend. Our people who are aging are actually more health conscious, as well they are having more money to spend for packaged goods as well. So it's the right place to be, and we believe in the growth of this market. Now, turning specifically onto the vending channel and the perspectives of it, let me start with another observation that we are having from our market analysis. and our consumer studies that we are doing. No matter the times, if it was before COVID-19 or after the COVID-19, what we learn about our consumers is they will definitely prefer convenience. And they were willing even to pay for that convenience. And that might be reflected in all the aspects of their life. including shopping behaviors. So if I would be to evaluate which channels in the market are actually serving the convenience occasion, convenient consumption occasion, there are, of course, the convenience store channel, there is the online channel, and as well is definitely the vending channel. Vending, by definition, offers convenience to the customers and to the consumers, and they like that. Hence, we believe that consumers will continue to shop in the vending channel. They will use the vending machines. Now, of course, I can be... challenged and continue the discussion around this topic in way more details by asking ourselves, for example, would the vending of the future would look exactly the same like the vending today? Well, probably not. Probably the vending machine per se will evaluate to a more digitalized tool with different ways of payment, offering continuously convenience and excitement through it. So we are confident in this channel, hence we made a commitment to expand horizontally in this channel, but in a very healthy business way going on, either through new machine placements or through partnership with other players in the market, getting columns maybe in other vending machines, or through merger and acquisitions in the future. Nevertheless, our primary focus is to make sure that our current vending machines are going to grow vertically, their volume, so we are going to sell more and more every day from the current machine universe. So I hope that answers the question both in terms of the NERTD market view for Japan as well about the vending channel.

Thank you, Colleen. We hope that answers your question. Did you have a second one?

Yes, thank you. But I have another question, and this is about vending again. So you have transformed your operation model for vending, and you said that you have accelerated the schedule for the project. And due to that, what is the cost reduction impact that you are seeing? I would like to have some quantitative details on that. Thank you.

The vending transformation that we've been working on and have accelerated during this COVID-19 year. And the question is around what are the impacts, what are the benefits that we're looking to achieve from a more numerical perspective this year. We'll pass it over to Bjorn, I think.

Thank you, Fujiwara-san. This is Bjorn. When it comes to the vending savings, these were part of the fundamental strategic business plan we went out late last year. And you recall inside that $35 billion of savings we promised, vending, of course, had a central spot. What the commercial team now has done is accelerating some of these changes in how we operate, as you call it, leading to double-digit reductions in the routes, and therefore less overtime, and therefore reducing the costs per case, basically. And for 2020 specifically, by accelerating these activities we are able, as of the beginning of Q3, to start changing how we work, changing how we operate, and therefore significantly improving the efficiency of our business. And as Colleen spoke about earlier, we have had significant cost savings, of course, in the first half. And as we move into the second half, we will pivot from... hopefully managing short-term and one-time revenue contractions into more going after the transformational savings, as we call them. And you also recall from our February ABP presentation for 2020, we promised $5 billion savings on a full-year basis. And I would say in the second half and the first half, we are good on track to deliver that. And therefore, the relentless pressures to transform the business and go off the details in this one will continue. Thank you.

Thank you, Bjorn. Fujiwara-san, I hope this answers your question.

Yes, thank you very much.

Question from Morita-san from Daiwa Security. Hi, this is Morita speaking. Talking about the stay-at-home demand, like other assumption, I know the vending is a very important channel. But then probably you might be looking at enhancing your positioning in online and the supermarkets. So I would like to see what's your plan on this, be it supermarket or the online channel share. I suppose Watsa-san has already mentioned about the disease plan. But the question is whether are you confident of gaining the share with that campaign or because I just felt that this is a little difficult This is too little campaign for you to gain the chain. So I would like to know which kind of promotion you will believe that you need to gain the shares in online and the supermarket going forward. Thank you.

The English-speaking audience here in the room, your question is, given the shift in channel mix that we're seeing with stay-at-home demand rising, I wanted to understand how are we thinking about positioning our brands and our marketing campaigns around other channels, supermarkets, online, and our plans for recovering market share across the market. I'm going to send this over to Kostin San first, and we'll follow up after that. Thank you.

Good afternoon. This is Kostin Andrea. Thank you for the question. So as you said, we see significant consumer and customer trends triggered by this crisis. And what we did in order to address these new trends was to re-plan our marketing calendar. I will give you some examples about online business. And we saw a great number of new users going online and shopping online. The importance of the channel for us increased to about 2% of the total volume, which is a significant increase. We did online dedicated promotions, and we boosted our resources of people working in online as a team. As well, we launched dedicated SKUs for online. For example, Eloha's Labelless in Q1, and recently, we just launched two weeks ago, another batch of Labelless products, Taka, Sokambicha, and Tansan, to meet this channel-specific demand. But beyond that, what we see, we see also home deliveries increasing. We see people taking out and using the or using Uber Eats. So what we did, we repurposed our marketing plans, and we repurposed our sales teams to be able to address this new consumer demand. Going forward, obviously, we are following closely what's happening in the market, and we are adopting our marketing plans. You saw already in Wasassan some examples what we are doing to stimulate at-home consumptions with Ayataka, and moving forward in Q4, we'll have new innovations to serve the consumer demand. I hope this answers your question. Thank you.

Thank you, Christine. Morita-san, did you have a follow-up?

I'm fine. I have a second point I would like to ask about the cost reduction and also transformation for the vending. I understand the contents. I understand what you're trying to say. But there might be a risk of losing the opportunity in the mid to long term. Because now you're saying that you are drastically reducing the OT, so there might be a risk of you not retaining a good talent. So do you have any worries over this kind of risk? Because some of the magazines and articles are reporting about this. So when it comes to the labor environment, I would like to see what's your view on this and whether you are very confident about having the discipline in-house.

Here the question is around cost reductions and transformation. Given the high cost reductions that we have been able to achieve so far, your question is, is there any risk around retention of talent and a more general question on how we would characterize the labor environment during this year. I'm going to pass this question over to Colleen, please.

Thank you so much for the question. And let me try to pick it a little bit from your very early ask, which was about our cost savings. I just want to remind the fact that We were explaining loud and clear the fact that we have type of savings that were like one-time cost savings for the year, which we were able to capture because we have reacted with a sense of urgency, and we were capturing the benefit early enough. And we are very happy that we were able to do so. One big decision that we made, it was that we are not going to stop the transformation that we have embarked because in our last year communication to all of you, we said loud and clear that this year we are going to start the transformation of our business with the mindset of change, agility, and learning culture as we are moving on While our main focus there, it was on people development, retaining talent, and growing talent in the company. Now, some of our initiatives in this very first half of the year cannot be called very popular, of course. And of course, we are not necessarily happy for the fact that we had to reduce the bonuses. A big chunk of our bonuses were related to performance, and since performance of this year is under an obvious threat and is not going to come, we had to hold back onto that, as well to a part of the fixed bonuses. And that was valid for all people in the company without any discrimination. And that was very clearly communicated to our organization. I said earlier... Of course, this is not a happy moment, and we are the first one to acknowledge it, but it's an absolute must for the situation of our company, and we were not hesitating to take that action. Now, looking to the future, speaking about our transformation, all our transformation efforts were successful. focused onto processes re-engineering, systems implementation, and transforming the way how we operate. We never started in this transformation with the mindset of we must cut headcount. I just want to be very clear and specific that we haven't mandated the functions to reduce the headcount. What have we started with? It was an explicit task to optimize and set up the business for the future reality here, best in class in Japan and best in class in the world. Simplify the processes, cut the unnecessary work, make everything easier. Now, with that optimization and increased efficiency will be some labor reduction as well. Well, that's a consequence of that transformation effort that we're going to make, but not a purpose on its own. In the meantime, I think I mentioned in one of my slides in the presentation, Our focus was on developing our people and leadership. And actually, in the middle of the COVID-19 crisis, we have launched the Coca-Cola University program for our young leaders. We have launched our new English program, GET. We have launched training programs for capability building in relation with our customers. A lot of efforts on retaining and growing our people have happened simultaneously. I hope this will give you some confidence on our initiatives and our strategy for the future. While we are convinced that this is well understood by our organization and are going to deliver results on medium to long term.

Thank you, Colleen. I hope that answers your question. Operator, we're ready for the next question, please.

Question from Yoshida-san from JP Morgan Securities. Hello, this is Yoshida from JP Morgan. You talked about your initiatives on offline channels. And in OTC channel, you have several commercial activities which you will proceed with. And digitization, what is your digitization, differentiation, what places you on a competitive advantage against others in digitization?

The question is around how we are leveraging digitization, digitalization, and transformation. to differentiate ourselves against our peers. I think we'll pass that off to Kostin San to start with.

Thank you for the question. This is Kostin. Digital and digitization of our company has a very high place on the agenda. And when we talk about activities to engage digitally the consumers, I give you a few examples from online. And obviously, we are very proud of continuous success of Coke on platform. Today, we have more than 20 million users, and we are running some very successful promotions for Coke on and for very important vending channels. But I would like, if you allow me for two minutes, to discuss about digitization of our Salesforce, which is a massive shift, and it is indeed building competitive advantage. And as you know, we have now one platform across CCBGI, which is Coke One, and we are exploiting this platform day in, day out for increased transparency and for better management decisions. You heard Colleen earlier that today all our Salesforce have mobile device. This year we distributed 17,000 phones and 14,000 laptops. But how are we using this? For our Salesforce transformation, we moved all the activities into digital, into online. From the way we build the routes, the visit routes, to the customer selling stories, introducing new products, but also to the day-to-day meetings. So right now, our sales force is It is not needed for them to come to the office. They have all these activities run in the online, and they have the latest tool implemented there. All the coaching and training that Colleen again spoke earlier, for the last six months we run them online with great success. And we are also very proud from Q1 we introduced a tool that is new on Japanese market is the photo recognition. So our sales force, our sales rep, is coming into a store, taking photos, and then in real time we can understand what's the situation in the store. We can recognize if there is an out-of-stock and we can improve this. We can see execution opportunities or price situation. This is in real time, and this is real digitization of our sales force. When we discuss about vending transformation, also this is enabled by digitization. From the way we build the routes right now, all of our routes are now GPS tracked, and we are able in real time to guide a track toward the vending machine based on traffic. This is bringing us additional efficiency. As well, we invested in capabilities. We have new positions in inventing route planners that are totally digital. And we are using technology to help with assortment and promotion decisions. We see clear deliverables for all these initiatives in the digital arena, and there are significant additional ideas that we have going forward. So this, I hope, is giving you a a bit of context what we are doing to build digital into a competitive advantage for us. And I would like to ask Bjorn also to add a bit of context. Thank you.

Thank you, Kostin. This is Bjorn. So, Yurchita-san, this is a very key question, and I'd just like to add a few seconds on what we're doing outside commercial, because this is not really about digitizing the front end of the people that touches consumers and customers. This is how we digitize what we call the enterprise. And we're taking the approach of optimizing processes, as you heard Colleen talk about earlier, and then we optimize how we use systems and therefore digital solutions to help us optimize the whole business. So this is about how we draw the connections between commercial into supply chain, where we automate the planning systems, and all the way to our back office optimization in our shared services. So this is really a comprehensive strategy on making our enterprise as digital as we can. Thank you.

Thank you very much. I hope this answers your question. We've got time, I think, for one more question in the queue. So, operator, we're open to another question, please.

Thank you. And this is regarding the vending business, and I heard that you have accelerated your so-called kinky project. And I'm sure that the environment is changing around the vending operation, but is there a possibility for you to restructure the industry? I mean, you know, the soft drink players, is there going to be a change, and what is going to be the profitability forecasts for the future.

Miyake-san, let me just repeat real quick. The question is on... This is Yoshida-san. Sorry. I'm very sorry about that. Yoshida-san, second question. This was a question on the restructuring and vending and if there's any additional opportunity around further restructuring, not just amongst ourselves, but in the industry. We'll send it over to Colleen, please.

Thank you so much for the interest in our business and for the question. Well, what we can say about the current situation of the vending business, of course, as we mentioned earlier, it's suffering because of this decrease of traffic as all the channels that are serving convenience and serving are influenced by the traffic like Horeca, like CVS, like the vending, all of them are suffering in these tough times, but with different percentages. What I have to say, I'm happy on our progress that we are making with the transformation. It is because we are aggressively adopting our cost structure to match these new realities, as well creating the flexibility for any opportunity on the future growth. So it's not enough to stay and contemplate the decline in the revenue by doing nothing in the way how we operate and how we run the operations in the specific channels. And that's valid for all the channels, not only for the vending. Having said that, I declare earlier to the previous question that yes, of course, we are looking in the market to any possible opportunity in the vending area. especially now that there are tough times for many of the players in the market. We are open to any possible collaborations in a way that will be a mutual benefit for all of us, and everybody will win into it. Now, I will refrain myself from speculating on what can happen in the future in terms of integration, We are definitely doing everything what's necessary to shape our business for the future because as described earlier, we believe in it.

Thank you, Colleen. Yoshida-san, I hope that answers your question.

Thank you.

We've got time for one more. Please, next question.

Okay. From Morgan Stanley, this is Miyake-san. Thank you. This is Miyake from Morgan Stanley. So I want to ask about cost and also the current sales situation in July. So firstly, regarding cost, it was impressive that you have achieved a great cost reduction in the first half. it was encouraging to hear that you're going to continue efforts in the second half, too. And I was looking at page 12, and you have, you know, 9.9 billion yen, and I think the major bucket is labor costs in that 9.9 billion yen. So which is like 2 billion yen in one cube. So excluding that, I'm sure that you were able to cut like 4 billion yen or so in labor costs. I'm sure that if the breakdown is like over time, et cetera. But can we believe that this will be kept next year on? How much of it will be realized, you know, next year on? Because I would like to understand the portion that's one time and the ones that is going to recur. And I don't know what your annual cost saving is, but let's say it's going to be 115 billion or so. But if it's 15 billion, how much of it will be realized next year again is my question. And next year, I'm sure, you know, is it going to be more than the 50 billion yen that we can expect next year as synergy costs? But I just want to know the perspective you have on cost reduction for next year on.

Because that was a lot in one question. I think at the end of the day, the question is around the amount of savings that we've managed to achieve this year, outlook for the rest of the year, and then next year. So essentially, how are we thinking about one time versus more recurring? If I – Miyake-san, is that kind of the basic part of the question, right?

Yes, that's my question.

Over to Bjorn.

Thank you, Ray, and thank you, Miyake-san, for the question. This is Bjorn. So, as you rightly said, in the first six months of the year, we have saved a good $10 And to give you a little bit of detail on these savings, I would say about 50, 60 percent of that is coming from miscellaneous labor activities. And you heard Colleen earlier said we have had temporary leave savings. We have reduced the fixed bonuses and definitely the variable bonuses. And you're also seeing significant reductions in our overtime as both volumes go down, but also how we change the way we work, which is very fundamental to our transformation. The other 40% of the savings year-to-date comes in logistics, travel, all other types of savings that we have in the businesses. When it comes to the remainder of the year, I think it's important that we still continue to focus on one-time savings to mitigate revenue contractions as much as possible while we're dialing up, as I said earlier, the transformation savings, now starting to focus on the vending that Christine has talked about and the salesforce transformation and also continuing the focus on our logistics costs. How much of this will be one time, how much will be transformational is, of course, something we keep on monitoring and trying to manage. And we will, of course, come back in the full year announcements when we have a better visibility, especially how the summer will come through. So because of time, I think I'll hold my answer there. Thank you.

Thank you, Bjorn. I hope this answered your question. Last caller in the queue as well.

The question from from Mizuho Securities. Hi, good afternoon everyone. My question is about the negative volume. Up until July, maybe your decrease is about double the average of the industry. So probably you have a great contribution, negative contribution coming from vending. So going forward, given that this COVID-19 is here to stay, what would be your channel strategy? to recover your share? What do you think will be the optimal channel strategy to recover your share and improve the performance in the market? I would like to hear about your view on this.

The question here in the room. Your question is on the volume performance, the decline that we saw in July. There was some share loss. in the period, and so your question is, as we look forward, what is the strategy, a channel or otherwise, on SHARE and how are we looking at SHARE going forward? I'm going to send this over to Colleen, please, and then we'll ask Costin to weigh in as well. Thank you.

Thank you so much, Sajisan, for the question. Let me quickly try to clarify a little bit the volume trend, as you mentioned it, if I can. I would like to remind everyone that we started the year extremely well in quarter one in January and February, and we were very happy that our transformation efforts that we started last year have started delivering. However, then later on the coronavirus impact start and in effect, the full effect of the emergency declaration of the government impacted the traffic But as well, a big impact of our business, it was the cancellation of the Olympics. So we had a very good start, and then we have started being affected by this reality. Now, the way how I look at the numbers are the following. On one hand, we are having a big hit that we are taking from the vending channel in terms of volume. But That's nothing wrong with the vending channel per se. It's a pure decline in traffic, which is generating that shortfall. And I am delighted to realize that year to date, we are getting significant market share in the vending channel. So we are not having there any particular issue to address at this moment in time, other than the traffic, I would say, that it's affecting vending CVS channel as well, Horeca, in primary. Now, in the OTC channels, in the last months, when we were planning actually to enter with a major Olympic campaign, as you might remember, we have shared with you that we are going to massively activate top five category brands, all of them billion-dollar brands, they would be activated during the Olympic Games, and we were expecting significant results out of it. Now, once the Olympics were canceled, we had to stop all that initiative. Of course, that stop immediately have affected, and because the main channels where we were planning to activate were actually the OTC channels, where the interaction with the consumer is more frequent. During that phase, we were, of course, not fully prepared, so we had to shift gears and replace the programs. And probably because of that delay in reaction and because of that impact of the new programs that we have put in place, we were not able to hold the market share for the time being. All our competitors in the market in the meantime, they were not having the Olympics in their programs. Olympics, it's an important asset of the Coca-Cola system every four years, and we are fully exploiting it. But not being able to use this asset by our competition, they have prepared the summer with probably aggressivity to balance our Olympic campaign. And right now, we are in impossibility to act on our Olympic programs while they are able to execute their programs with a certain balance for the time being. I'm confident that with the programs that we are putting them in place, that issue is going to be resolved on the second part of the year. I'm saying more towards quarter four. Now, another element that I want to draw your attention, and then I'm going to pass it to Christine, It's somewhere in the presentation in the pricing chart. Last year, I would like to remind everyone, we made a historic move. For the first time in 27 years, we made the decision to put the prices up on the future consumption packages which are sold primarily in the OTC channels. We put the prices up and Now we are one year and a quarter later, and we are very proud to draw your attention to the fact that we are still trending in terms of pricing for future consumption packages ahead of the market and well ahead of our competition. Now, we have kept our promise to keep the prices up and to continue to drive value in the industry for the time being. Of course, we are keeping all our options open for the future in order to be able to react to the market development and the realities in Japan. Now I would like to pass it back to Kostin if there is anything more specific to add to this. Thank you.

Thank you. This is Kostin. Thank you, Kalin. Just to add on this, obviously, together with our partners in CCJC, we had to course correct the marketing plans And we'll see the results of the new plants in the market in Q3 and Q4. And I want to give you three examples of activities that are addressing the new consumer and customer demands. First of all, coffee. We saw Georgia performing very well in terms of share, and we see now a very good combination between Georgia, Japan Craftsman, SOT, and Bottle Can. And the latest addition this year, Latinista, also performed in line with our expectations. In September, we have an integrated campaign across all channels to grow even more the coffee and to build on this positive momentum. Second is Ayataka. You heard from Wasa-san that we are building on this new trend of eating at home, and we'll start a new improved campaign for all the consumers. The third activity that we have, and it's again across all channels, you heard us talking a lot about RGM initiatives. We launched at the end of last year the 350-700 packages in supermarket, replacing our 500 ml Coke, performing very well. So we decided to expand gradually this across the country. In the meantime, we launched in CVS 950 ml, Ayataka, Socon Beach, Aquarius. Again, we see very good performance. So going forward, we'll accelerate what we see is working, and we are building on the new consumer needs and customer demands. And I will wrap up, if you allow me, just with a lesson from the COVID time. We learned that delivering beverages is a critical service for society. And I want to send a message of appreciation for all our customers who kept running their stores, who kept serving their customers, as well to our sales force who kept serving our consumers with increased safety measures. Thank you.

Thank you very much. I think we've hit the well past the end of our scheduled call time. I'd like to thank everyone for your active participation and interest. We look forward to following up with you among the IR team and with our management team here. Operator, this concludes our call. Thank you very much.